Non-Manufacturing Activity Slows Its Advance In June - July 3, 2013

At 10:00 A.M. (EDT) this morning, we received an unimposing report on non-manufacturing activity for the month of June. Although the reading came in above 50.0, which indicated that the sector is growing, the rate of expansion slowed considerably from the May, 2013 reading and came in below the consensus expectation.

Specifically, the Institute for Supply Management said that non-manufacturing activity registered 52.2 in June, 1.5 percentage points lower than the seasonally adjusted May reading of 53.7; an indication that non-manufacturing expanded at a pedestrian pace last month. In addition, the Non-Manufacturing Business Activity Index fell to 51.7, well off the prior month’s tally of 56.5, but it still marked the 47th consecutive month of growth. Moreover, the New Orders Index decreased by 5.2 percentage points, to 50.8.

Although the non-manufacturing (services) sector is still expanding, the pace remains rather mundane. This data will be closely watched by the Federal Reserve, as it assesses whether the economy is in good enough shape later this year to withstand the winding down of the lead bank’s supportive bond-buying program. The non-manufacturing (services) sector accounts for roughly two-thirds of the nation’s economic output, so the central bank will be rather cognizant of how the sector is doing before it puts the brakes on its accommodative monetary policy. It should be noted that 14 non-manufacturing industries surveyed reported growth in June, while four saw a contraction in their industries.

Meantime, there was an encouraging sign in the latest report. Specifically, the Employment Index increased by 4.6 percentage points to 54.7, indicating expansion in employment for the 11th consecutive month. This reading, coupled with this morning’s report from Automatic Data Processing that showed private-sector payrolls increased by a larger-than-expected margin in June had to be well received by the Federal Reserve, which has the dual mandate to promote full employment and keep prices stable.

All in all, the latest report on non-manufacturing activity was not a game changer, but it does reiterate what we have been saying for quite some time; specifically that the U.S. economy continues to climb at an unimposing and uneven pace. This, coupled with several reports on the domestic economy issued in the last few weeks, including this morning’s disappointing report on the international trade gap, are more signs that growth in the recently ended June quarter may not have been as good as prior expectations and that second-half GDP growth should lie in the area of 2% or so, which would be far from ideal in this stage of the business up cycle.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.